Lecture 1 Conceptual Framework

International Financial Reporting Standards
The views expressed in this presentation are those of the presenter,

not necessarily those of the IASB or IFRS Foundation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Conceptual Framework
for Financial Reporting
Joint World Bank and IFRS Foundation train
the trainers workshop hosted by the ECCB,
30 April to 4 May 2012
K

The views expressed in this presentation are those of the presenter, not
necessarily those of the IASB or IFRS Foundation.
Adopted by S. Shorter
Lecturer - McGrath High
School
2010 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Role of the Conceptual Framework
Conceptual Framework sets out agreed concepts that
underlie financial reporting
objective, qualitative characteristics, elements, recognition
and measurement concepts.
IASB uses Conceptual Framework to set standards
enhances consistency across standards
enhances consistency over time as Board members change
provides benchmark for judgments
Preparers use Conceptual Framework to develop
accounting policies in the absence of specific standard or
interpretation
IAS 8 hierarchy
2
Conceptual Framework for Financial
Reporting
DISTRIBUTE
HAND OUTS
The Framework has three different
levels,comprised of:
The first level consists of objectives.
The second level explains financial elements and
characteristics of information.
The third level incorporates recognition and
measurement criteria.
Overview of the Conceptual
Framework
5 5
Objective of financial reporting
Provide financial information about the reporting entity
that is useful to existing and potential investors, lenders
and other creditors in making decisions.

Investors, lenders and other creditors expectations
about returns depend on their assessment of the
amount, timing and the prospects for future net cash
inflows to the entity.

6 6
Qualitative characteristics
If financial information is to be useful, it must be
relevant and faithfully represent what it purports
to represent (ie fundamental qualities).
The usefulness of financial information is
enhanced if it is comparable, verifiable, timely
and understandable
7 7
Fundamental qualitative characteristics
Relevance: capable of making a difference in users
decisions. Ingredients of relevant information are:
Timeliness
Predictive value
Feedback value
Faithful representation: faithfully represents the
phenomena it purports to represent
completeness (depiction including numbers and words)
neutrality (unbiased)
free from error (ideally)
Note: faithful representation replaces reliability
8 8
Enhancing Qualitative Characteristics
Comparability: the similar measurement and
reporting for different enterprises.
Verifiability: knowledgeable and independent
observers could reach consensus, but not
necessarily complete agreement, that a depiction is
a faithful representation
Timeliness: having information available to
decision-makers in time to be capable of influencing
their decisions
Understandability: Classify, characterise, and
present information clearly and concisely

9 9 9
Pervasive constraint
Reporting financial information imposes costs, and it is
important that those costs are justified by the benefits of
reporting that information.
Benefits include more efficient functioning of capital markets and a
lower cost of capital for the economy.
Costs include collecting, processing, verifying and disseminating
financial information and the costs of analysing and interpreting the
information provided.
In applying the cost constraint, the IASB assesses whether
the benefits of reporting particular information are likely to
justify the costs incurred to provide and use that information.
Those assessments are usually based on a combination of
quantitative and qualitative information.

10 10 10
Summary
Reporting financial information that is relevant and
faithfully represents what it purports to represent
helps users to make decisions with more
confidence (ie financial information must possess
the fundamental qualitative characteristics).
IFRS requirements must be cost-beneficial
Applying the enhancing qualitative
characteristics is an iterative process that does
not follow a prescribed order. Sometimes, one
enhancing qualitative characteristic may have to
be diminished to maximise another qualitative
characteristic.

11 11
Elements
Asset: Resource controlled as a result of past events and
from which future economic benefits are expected to flow
Liability: Present obligation arising from past events, the
settlement of which is expected to result in outflow of
resources embodying economic benefits
Equity: Assets minus liabilities
Income (expense): Increases (decreases) in economic
benefits during period from inflows or enhancements
(outflows or depletions) of assets (liabilities) or decreases
(incurrences) of liabilities from in increases (decreases) in
equity, other than contributions from (distributions to) equity
Basic
Assumptions
1. Economic
entity
2. Going
concern
3. Monetary
unit
4. Periodicity
Principles
1. Historical
cost
2. Revenue
recognition
3. Matching
4. Full
disclosure
Constraints
1. Cost benefit
2. Materiality
3. Industry
practices
4. Conservatism
Recognition and Measurement
Criteria
13
Recognition
Accrual basis of accounting
recognise element (eg asset) when satisfy
definition and recognition criteria
Recognise item that meets element definition when
probable that benefits will flow to/from the entity
has cost or value that can measured reliably

14 Measurement concepts 14
Measurement is the process of determining monetary
amounts at which elements are recognised and
carried. (CF.4.54)
To a large extent, financial reports are based on
estimates, judgements and models rather than exact
depictions. The Framework establishes the concepts
that underlie those estimates, judgements and models
(CF.OB11)
IASB guided by objective and qualitative
characteristics when specifying measurements.

See financial reports
Assignment (see next slide)
15
Assignment
Past paper question. Q. 1, 2013
a. Outline the structure of the Conceptual Framework
of Accounting. (6 marks)

b. State THREE reasons why the Conceptual
Framework of Accounting was developed by the
International Accounting Standards Board (IASB).
(3 marks)

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International Financial Reporting Standards

The views expressed in this presentation are those of the presenter,

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